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Cablegate: Ustr Finds Ipr Progress, Challenges in Indonesia

VZCZCXRO6802
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1388/01 1360856
ZNR UUUUU ZZH
R 160856Z MAY 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4748
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0519
RUEHBY/AMEMBASSY CANBERRA 0752
RUEHBJ/AMEMBASSY BEIJING 4086

UNCLAS SECTION 01 OF 05 JAKARTA 001388

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EB/TPP/MTA, EB/TPP/IPE AND EAP/MTS
TREASURY FOR IA-CIORCIARI
SINGAPORE FOR BAKER
USDOC FOR BERLINGETTE/4430
DEPT PASS USTR DKATZ, WEISEL, BAE

E.O. 12958: N/A
TAGS: ETRD KIPR EINV ECON EMIN KCOR ID
SUBJECT: USTR FINDS IPR PROGRESS, CHALLENGES IN INDONESIA

REF: A) Jakarta 1212 - New Investment Law;

B) Jakarta 1326 - East Java-China Trade

1. (SBU) Summary. Visiting USTR officials Barbara Weisel and David
Katz reviewed efforts related to intellectual property rights (IPR)
protection and enforcement in Indonesia during their May 3-4 visit
to Jakarta. Members of the National IPR Task Force noted that
difficult and ongoing challenges remained to improve policy
coordination by the Task Force, and U.S. business leaders reported
that prosecutions and convictions of IPR pirates remains low, and
dialog with private industry, especially on pharmaceuticals is weak.
The Chairman of the Investment Coordinating Board (BKPM) Muhammed
Lutfi, in response to concerns that foreign investors will need a
letter of recommendation from BKPM to obtain a work visa (and thus a
"backdoor" approval) under the new investment law, said that the
BKPM will set up an immigration office in its headquarters to
facilitate. A garment industry buyer said competition and
transshipments from China are hurting Indonesia's textiles and
garments sector, while a mining industry representative said that
mining is "flat on its back" in Indonesia, despite high
prospectivity, due to the unfriendly business climate. In meetings
with ASEAN, Katz emphasized cooperation between the U.S. Food and
Drug Administration and ASEAN on pharmaceuticals issues. USTR is
also encouraging ASEAN members to attend a Sanitary and
Phytosanitary workshop in Vietnam in July to learn more about
irradiation of tropical fruits to improve access to the U.S. market.
End Summary.

IPR: Progress and Challenges
----------------------------

2. (SBU) During a May 3-4 visit to Jakarta, visiting Assistant U.S.
Trade Representative (AUSTR) Barbara Weisel and USTR Director for
Southeast Asia and Pacific Affairs David Katz met with the American
business community, the National IPR Task Force, IPR advisors, ASEAN
officials, a member of Parliament's Commission VI, and a prominent
member of the Indonesian Chamber of Commerce. At a May 3 AmCham
lunch, business representatives gave an update on several issues,
with emphasis on the continuing challenges of intellectual property
rights (IPR) enforcement in Indonesia. The head of the AmCham IPR
Committee noted several problems in the IPR area:

-- The National IPR Task Force still does not have a reliable
budget. It also does not have a forum for dialog and consultation
with the private sector.

-- Customs Law 10/95 was finally amended in November 2006 and allows
for Customs to take action without having to get court permission in
advance. It still requires implementing regulations, however.
(Note: Embassy learned from Customs Human Resources Department Head
and former IPR Division Head Okto Irianto, that Minister Mulyani
will review the draft regulations for further inter-ministry
discussion.)

-- Legal reform overall still lacks transparency, enforcement and
decisions need to be made public. Judges need more training in IPR.
More deterrence is needed for IPR piracy.

National IPR Task Force: Still New
----------------------------------

3. (SBU) In a meeting with the National IPR Task Force (TF) on May
4, USTR Weisel congratulated Indonesia on remaining on the Watch
List, and noted that the formation of the IPR TF was big news.
Ansori Sunungan, the Director for Copyrights and Industrial Design,
said that the IPR TF has the goal of coordinating among relevant
agencies, show the seriousness of the GOI, and perform public
outreach and education to support IPR development in Indonesia.
Cooperation among law enforcement agencies remains a huge problem.
There is a view here that "piracy creates jobs," Ansori admitted.
"The high U.S. price for genuine DVDs is also challenging for the
market here," he argued. For Global IP Day on April 26, Indonesia
held a series of seminars and events, including an "integrity
awards" ceremony at which Vice President Kalla was the keynote
speaker. Kalla praised creativity and innovation in his speech, and
spoke of the importance of legal protections.

4. (SBU) The National IPR TF plans to meet at least once a month,
and report every six months directly to President Yudhoyono. The
IPR TF has five priorities through 2009, to be carried out by

JAKARTA 00001388 002 OF 005


special working groups:

-- Law enforcement issues (Regulation 2004/29);

-- Review and analyze applicable regulations;

-- Outreach and public relations;

-- Human resources and capacity building;

-- International Cooperation.

5. (SBU) The IPR TF also plans to set up a Secretariat. AUSTR
Barbara Weisel asked about the TF's budget. Ansori responded that
the budget is authorized under Presidential Decree No 4/2006 Article
11 "All costs associated with IPR Task Force activities is levied on
the Ministry of Justice and Human Rights budget." The IPR TF has
submitted its budget request to the Ministry of Finance, but has not
yet received its own dedicated funding. The IPR TF is also looking
at other budget sources as well. There will be a Ministerial level
meeting with the IPR TF at least once a year, and three Ministers
are very actively engaged: Coordinating Minister for the Economy
Boediono, Trade Minister Pangestu, and the Minister of Law and Human
Rights. Ministry of Trade's Ambassador Halida Miljani urged U.S.
assistance in improving data collection on IPR violations, better
case management and training of judges in IPR matters. Halida said
her goal is for all police, prosecutors and judges to have the same
level of knowledge on IPR.

Food and Pharmaceuticals IPR Issues
-----------------------------------

6. (SBU) Pharmaceuticals companies continue to face challenges and
complain there is "no level playing field" as domestic companies do
not have to comply with World Health Organization codes and
standards, while foreign companies do. One AmCham member claimed
there is a nasty pattern of regulatory discrimination against
foreign investors. Other representatives expressed their concern
that the GOI requirement that all branded pharmaceuticals include
the generic name of the medicine on the label at 80% of the size of
the brand name, and in the same font and color as the brand name,
could have a major impact. Expert panels on nutrition do not
reflect the greater body of science. The views of the experts are
often not shared, and industry is not permitted to respond or put
forth a position. It is not clear how "experts" are selected for
the panel: they seem intended to simply create an artificial trade
barrier. One drug company representative said there is "no
transparency" on pricing and labeling issues for pharmaceuticals.
"Not only are the GOI's doors closed, they are locked," she noted.


Halal: Lack of Standards and Certifiers
---------------------------------------

7. (SBU) There is no standard or guidance for halal certification
and labeling in Indonesia, and a lack of certifiers, which affects
both the food and drug sectors. The Ministries are not
communicating well with each other. USTR Weisel noted that this is a
global problem, with no agreement between religious groups and no
international halal standard. Industry currently pays a nominal fee
for certifiers, but may eventually have to pay a much higher fee per
unit. ASEAN may need to discuss having at least a regional halal
standard. Currently, there is no consistency across borders.
Weisel noted the importance that the religious standards of halal
are met, but suggested that it would be useful to explore ways to
agree on a regional or international standard of halal to avoid
creating another non-tariff trade barrier.

Optical Discs: More Enforcement Needed
--------------------------------------

8. (SBU) One of the Embassy's IPR advisors noted that there are 29
registered Optical Disc (OD) factories in Indonesia with a potential
capacity to produce at least 500 million ODs. Industry estimates
the annual legal requirement domestically at only around 15 million
ODs. Despite Customs efforts and a licensing requirement for
imports of optical-grade polycarbonate, large quantities continue to
be smuggled in each year to support illegal manufacture. When OD
factories were registered and required to engrave Source
Identification Codes (SID) on production line molds, however, many

JAKARTA 00001388 003 OF 005


factories have resorted to obscuring the engraved SID codes using
heat resistant resins and they continue to produce illegal ODs.
Factory inspectors are having difficulties. They have been kept
waiting outside for 30 minutes or more while factories "clean up."
When they finally enter, machines are warm but managers deny they
are active.

9. (SBU) The Ministry of Industry representative said the Ministry
lacks sufficient law enforcement support. It has the power of
inspection but not the power to enter the factories, which only the
police can do. The head of the AmCham IPR committee noted that
President Yudhoyono has received the National IPR Task Force report,
but has not yet made any public comment on the report or a statement
on the need for improved IPR enforcement. In a subsequent meeting
on May 5, the Embassy's two IPR advisors and a regional investigator
for the recording industry association (IFPI) said the lack of
continuity and documentation of raids is an ongoing problem. There
is no timeline on what raids will occur where, and no follow-up
through prosecution by the courts. The actions taken thus far by
the GOI have received - deservedly - a lot of recognition and
credit. But we need to measure results by the actual reduction in
the availability of pirated material.

10. (SBU) AUSTR Weisel noted with regret that Ratu Plaza, a center
for pirated OD vendors, was back up and running after two weeks of
closure, with a pirated copy of the just-released movie "Spiderman
3" available for $0.45. The IPR advisors said that change to the
high-profile malls must be done incrementally, to gradually change
out pirates with vendors of genuine goods. Gambling, narcotics and
OD piracy had been three major sources of funding for the police.
Now only OD piracy remains. The IFPI investigator believes that OD
pirates have invested $400-500 million in pirated OD production in
Indonesia.

End-User Piracy and Microsoft MOU
---------------------------------

11. (SBU) Microsoft representatives lamented that Indonesia has the
third worst software piracy in the world after Zimbabwe and Vietnam.
The Memorandum of Understanding signed in November 2006 had as a
goal for the Government of Indonesia (GOI) to take steps to replace
the estimated 87% pirated software on GOI computers by March 31,
2007. MS offered an 80% discount to put legitimate software on all
GOI computers, estimate at 510,000 units. Total cost would be
approximately $45 million, a savings to the GOI of $260 million.

12. (SBU) However, the Ministry of Information and Communications
Technology did not put in a request for funds for the MOU in the
2007 budget, and in March 2007, the Business Competition Supervisory
Commission (KPPU) urged the GOI to annul the deal in an advisory,
stating it violated the 1999 Monopolies Law. Although not as strong
as a formal KPPU ruling, the advisory has shaken the GOI. The
KPPU said that many computers in the GOI were using open-source
software, and that the MOU would "hand Microsoft a monopoly." The
KPPU said the GOI and MS could face sanctions if it pursued the MOU.


13. (SBU) Former MICT Minister Sofyan Djalil has subsequently said
MICT would have to review the estimate of 510,000 computers and
asked if the National Bureau of Statistics (BPS) could do it.
Microsoft has countered that if the estimate of 510,000 computers
was too high, it would adjust its price accordingly at the
discounted rate. (Comment: The stalled MOU reflects a lack of
ownership in the GOI for solving pirated software use in the
government. It is unclear which Ministry has the lead. The GOI
does not currently appear to have any alternative strategy to the
MOU.)

Textiles and Garments:
China Challenge
----------------------

14. (SBU) A representative of the garment industry noted that there
is not one brand or manufacturer her that does not understand the
challenge of China. Indonesia has a window of opportunity to be
number two, but has to deal with the transshipment problem first
(reftel B). The industry representative reported that growth in
Indonesia-based production of just one international brand was 40%
last year.


JAKARTA 00001388 004 OF 005


Mining: "Flat on Its Back"
--------------------------

15. (SBU) A representative of a major mining company noted that the
mining industry is "flat on its back" in Indonesia. The Director
General for Mines recently stated at an international conference
that foreign investors may need to partner with a state-owned
company that will have 51% ownership. The GOI is considering
requiring mining firms to process their ore domestically. Under
current law, they have the option to export ore or process it
domestically. In some cases, illegal miners outnumber legal ones.
Indonesia is in the top ten for geologic prospectivity but near the
bottom as an attractive place to invest, according to a widely
respected industry survey. Data from Chile that poverty has been
alleviated by 40% in areas surrounding mines falls on deaf ears
here. Significant elements of the legislative and executive
branches of the GOI seem to prefer to deal with Chinese, Korean and
politically well-connected domestic investors such as Bakrie. They
are not interested in U.S. investment right now. Mining and other
extractive industries are very concerned about Article 33 of the new
investment law, which criminalizes tax disputes (reftel). This
article was not in the GOI's original draft, but inserted by
Parliament.

Investment Issues: Negative List Pending
----------------------------------------

16. (SBU) In a meeting with the Chairman of the Investment
Coordinating Board (BKPM) Muhammad Lutfi, Lutfi said the new
investment law is not necessarily better than what we had in 1967.
Much of Indonesia's current problems with the business climate are
not related to laws or regulations, but implementation at the local
level. "The problem is at the bottom of the pyramid," Lutfi noted.
"We can't control the harassing behavior of the Echelon IV and V
officials." Lutfi said that the new negative list would be very
progressive, but would not give a timeline for its completion. He
criticized Trade Minister Pangestu for asking line ministries for a
wish list for the negative list, stating this would only open it up
for expansion. (Note: There is no love lost between Lutfi and Trade
Minister Pangestu.) On the controversy surrounding the need for a
letter of recommendation for foreign investors to receive employment
visas (reftel A), Lutfi said that there will be an immigration
office in the BKPM itself. Only foreigners who "misbehave" will
have any difficulty. Regarding one-stop shops, eventually they will
be in every province that needs one.

17. (SBU) In a meeting with Parliamentary Commission VI (Trade,
Industry, Cooperatives and State-Owned Enterprisses) Chairman Didik
J. Rachbini, he noted that the new investment law will bring three
levels of openness: completely open, open with conditions, and
closed. The composition of the negative list is now in the hands of
the GOI. Some national groups have criticized the new investment
law is too liberal. The issue of natural resources is still under
discussion for implementing regulations. If a sector is located in
one province only, it will be the decision of the provincial
government. If an investment crosses two or more sectors, the
central government will be responsible. However, all FDI will be
managed by the central government. The BKPM will eventually open
provincial offices.

18. (SBU) The DPR looked at the investment laws of several other
countries while crafting the law. Rachbini opined that the labor
law amendments were very sensitive, and he was not optimistic about
any near-term progress, though he said there could be some progress
on labor in Special Economic Zones (SEZs) He said that nine or ten
provinces are competing for SEZs. USTR Weisel asked about local
awareness of these investment issues. Rachbini said there is not
much awareness about the investment debates in the capital. When he
travels home, he noted, "There are three things people worry about,
the price of rice, the price of corn and the price of sugar."

ASEAN Issues: Pharmaceuticals and SPS
-------------------------------------

19. (SBU) In meetings with ASEAN officials, USTR David Katz focused
on the next steps to follow up the initial contact between U.S. Food
and Drug Administration (FDA) and ASEAN on pharmaceuticals issues.
The FDA suggested working through the Global Cooperation Group (GCG)
of the International Conference on Harmonization (ICH). FDA experts
will participate in a GCG meeting in Japan in the fall and could

JAKARTA 00001388 005 OF 005


potentially meet with ASEAN afterwards. Katz noted that it is rare
for the FDA to engage with international experts outside the ICH
framework, so ASEAN should take advantage of this opportunity. Ms.
Giang Le Chau, the ASEAN Secretariat's Senior Officer of Standards
and Conformance, appreciated the need to follow up but cautioned
about some ASEAN sensitivity with the ICH, which is supported by
multinational corporations. She says that even if the initial
pretext for the FDA to come to the region is the ICH, discussions
with ASEAN should be portrayed as "government-to-government,
regulator-to-regulator" talks. She thought it would be useful to
develop a list of project for which ASEAN needs technical assistance
and provide that to the FDA.

20. (SBU) Katz was not certain that such a list of assistance needs
would be a useful way to proceed, thinking that policy discussion
with the FDA, at least initially, would be useful to lay the
groundwork for more technical talks. Katz suggested that if the FDA
and ASEAN were to engage in further discussions, this might improve
the prospects for further collaboration in the future. The initial
key is to get the FDA out to ASEAN. The ASEAN delegation had a
successful visit to the FDA Center for Drug Analysis and Research
(CDER) Forum in Washington in April. USTR and the ASEAN
Secretariat, along with members of the ASEAN Consultative Committee

SIPDIS
for Standards and Quality (ACCSQ) Pharmaceutical Products Working
Group (PPWG), will need to develop next steps for work under the
TIFA on the ASEAN Common Technical Dossier for pharmaceuticals
registration and approvals procedures. Katz also made a pitch for
multinational corporations to be included in the dialogue sessions
with the ASEAN Working Group on Pharmaceutical Products. Giang
noted there have been problems in the past resulting in restrictions
that only permitted ASEAN nationals to attend. However, she thought
the Chairman of the group was showing signs of softening on this
tough position.

21. (SBU) On Sanitary and Phytosanitary (SPS) issues, APHIS is
proceeding with the workshop in Ho Chi Minh City, Vietnam in July on
the irradiation of fruits and has sent invitations to all ASEAN
Member Countries except one. Mr. Somsak Pippopinyo, Head of Natural
Resources Unit, said that the ASEAN Secretariat was willing to be
helpful to inform member countries of the event, but was not certain
of its role. They expressed a willingness to inform the ASEAN
Experts on SPS Issues of the seminar, when it meets June 18-19 in
Kuala Lumpur, and asked whether APHIS would like to make a
presentation at the workshop. Katz said APHIS liked the idea of
working at the regional level to be efficient at explaining the
requirements for access to the US market for fresh fruits. However,
he doubted if APHIS had a budget to support an extra trip. He
promised the Secretariat to provide the list of acceptances for the
seminar.

22. (U) USTR contributed to and cleared on this message.

HEFFERN

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